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2015 (11) TMI 1775 - AT - Income TaxCapital gain u/s 45 r.w.s. sec. 48 - assessee has transferred the land and received security deposit and that security deposit was again reinvested in making the construction of the malls - colourable device to avoid the tax - HELD THAT - From the question of law admitted in LAKE PALACE HOTELS AND MOTELS LTD. 2008 (4) TMI 449 - RAJASTHAN HIGH COURT nowhere it is stated that if the assessee has received any security deposit against the lease rent of security deposit it is not chargeable to capital gain u/s 45 r.w.s. sec. 48. Therefore CIT(A) is not justified in relying upon the decision of Hon ble Rajasthan High Court. We therefore are of the view that the issue in controversy is covered by the Jodhpur ITAT Bench in LAKE PALACE HOTELS & MOTELS LTD. 2004 (3) TMI 771 - ITAT JODHPUR but it is not decided by Hon ble Rajasthan High Court. We find that in the instant case assessee has transferred the land and received security deposit and that security deposit was again reinvested in making the construction of the malls. We find that the said transaction is not a sale transaction. The Assessing Officer has held that the transaction entered into by the assessee with Kalani Bros and Padma Homes are colourable device on the ground that the lease agreement is stage managed affairs of the assessee. No interest was charged on the security deposit. AO has also referred this matter to District Registrar and he was of the view that it is a colourable device. As we have already held that transaction is not avoiding the tax and assessee has made registered agreement therefore unless and until Assessing Officer proves that assessee has made this colourable device to avoid the tax. We find that in the instant case during the course of hearing AR has specifically submitted before us that the same transaction is already over and assessee has already transferred its land to some other person therefore this transaction is already over and when this transaction is already over as per the decision of Jodhpur Bench (supra) the assessee is not liable for capital gain and CIT(A) is justified in his action. During the course of hearing the ld. DR could not bring any contrary decision against the Jodhpur Bench. We do not find any contrary decision therefore we endorse the action of the CIT(A). We state that the CIT(A) has without looking to the facts of the Rajasthan High Court judgment relied the judgment. We find that this judgment of Hon ble Rajasthan High Court is not applicable to the facts of the assessee s case. We therefore reverse the finding of the ld. CIT(A) but we agree on the decision of CIT(A) on the basis of Jodhpur ITAT decision. Assessment u/s 153A - proof of incrementing material found in search - HELD THAT - It is a settled legal position that once a search and seizure action has taken place u/s 132 of the Act or a requisition has been made u/s 132A the provisions of section 153A trigged and Assessing Officer is bound to issue notice u/s 153A of the Act. Once notices are issued u/s 153A then assessee is legally obliged to file return of income for six years. The assessment and reassessment for six years shall be finalised by the AO. It is also held by various Courts that once notice u/s 153A issued then assessment for six years shall be at large both for AO and assessee have no warrant of law. It has been also held that in the assessment years where assessments have been abated in terms of second proviso to section 153A then Assessing Officer acts under original jurisdiction and one assessment is made for total income including the addition made on the basis of seized material. But where there is no abatement of assessments and assessments were completed on the date of search then addition can be made only on the basis of incriminating documents or undisclosed assets etc. In these cases there was no incriminating document found and seized. No assessment proceedings were abated in these assessee. Thus assessments for these assessment years were completed on the date of search. The assessments were completed u/s 143(3) read with section 153A/153C of the Act after the search. There was no abatement of any proceedings in these cases for these assessment years in terms of second proviso to section 153A of the Act. There is no seized material belonging to the assessee which was found and seized in relation to additions made. In a recent decision Hon ble Delhi High Court in the case of CIT vs. Kabul Chawla 2015 (9) TMI 80 - DELHI HIGH COURT has held that completed assessments can be interfered with by the Assessing Officer while making assessment u/s 153A of the Act only on the basis of some incriminating material unearthed during the course of search or requisition of documents or undisclosed income or property discovered in the course of search which was not produced or not already disclosed or made known in the course of original assessment. In all these cases no assessments were pending on the date of search for these assessment years. No assessments were abated in terms of second proviso to section 153A of the Act.
Issues Involved
1. Capital Gain on Transfer of Land 2. Nature of Lease Transaction 3. Validity of Assessment under Section 153A 4. Treatment of Security Deposit 5. Nature of Lease Rent and Other Expenses Detailed Analysis 1. Capital Gain on Transfer of Land The primary issue revolves around whether the lease transaction constituted a "transfer" under Section 2(47) of the Income Tax Act, thereby attracting capital gains tax. The Assessing Officer (AO) treated the refundable security deposit as sale consideration and taxed it as capital gains, arguing that the lease agreement was a "colorable device" to evade taxes. However, the Commissioner of Income Tax (Appeals) [CIT(A)] and the Income Tax Appellate Tribunal (ITAT) found that the transaction did not constitute a transfer of ownership but was a genuine lease agreement. The ITAT relied on the decision in the case of Lake Palace Hotels and Motels Ltd., where it was held that a refundable security deposit does not amount to consideration for transfer, and thus, no capital gains tax could be levied. 2. Nature of Lease Transaction The AO contended that the lease agreement, which included a non-interest-bearing refundable security deposit, was essentially a sale of the land. The AO pointed to the low lease rent, the absence of interest on the security deposit, and the rights granted to the lessee, such as the right to mortgage and demolish existing structures, as indicators of a transfer of ownership. However, the CIT(A) and ITAT found that these conditions are typical in long-term lease agreements and do not imply a transfer of ownership. The ITAT emphasized that the land would revert to the lessor after the lease period, reinforcing the nature of the transaction as a lease rather than a sale. 3. Validity of Assessment under Section 153A The AO initiated proceedings under Section 153A following a search action, arguing that the lease transaction was a transfer and thus taxable. The CIT(A) and ITAT found that no incriminating material was discovered during the search to justify reopening the assessment under Section 153A. The ITAT cited the Special Bench decision in the case of All Cargo Global Logistics Ltd., which held that in the absence of incriminating material, completed assessments cannot be reopened under Section 153A. Consequently, the ITAT deemed the assessments under Section 153A invalid. 4. Treatment of Security Deposit The AO treated the refundable security deposit as sale consideration, arguing that the lease agreement was a sham to avoid taxes. The CIT(A) and ITAT disagreed, finding that the security deposit was genuinely refundable and not a consideration for the transfer of land. The ITAT noted that the security deposit was reinvested in shares of the lessee company, which was a business decision aimed at future gains. The ITAT held that the refundable security deposit could not be treated as consideration for a transfer, and thus, no capital gains tax could be levied. 5. Nature of Lease Rent and Other Expenses The AO also questioned the low lease rent and disallowed certain expenses, arguing that they were not related to the business. The CIT(A) upheld the disallowance of expenses but found that the lease rent was consistent with the nature of the transaction. The ITAT agreed with the CIT(A) on the lease rent, noting that it was typical in long-term lease agreements. However, the ITAT upheld the disallowance of expenses, finding no evidence to link them to the business activity. Conclusion The ITAT upheld the CIT(A)'s decision, finding that the lease transaction did not constitute a transfer of ownership and thus was not subject to capital gains tax. The ITAT also found the assessments under Section 153A invalid due to the absence of incriminating material. The refundable security deposit was not treated as consideration for a transfer, and the lease rent was deemed appropriate for the nature of the transaction. The disallowance of certain expenses was upheld due to a lack of evidence linking them to the business.
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